Fleshing Out An Empire

There was nothing wrong, back in April 1982, with Fitness Finders Inc. The little consulting firm's Living Well program -- a physical-fitness package it sold to corporations, which in turn offered the program to their employees -- was popular. Mainly on the strength of Living Well, the company had grown to 13 employees and $500,000 in annual revenues. It had even received an infusion of $75,000 in venture capital from, of all people, Campbell Soup Co.

Founders Charles and Beth Kuntzleman, however, were feeling less than fine. Sitting in adjoining offices at the company's Spring Arbor, Mich., headquarters, the Kuntzlemans couldn't help feeling that they had just passed up the chance of a lifetime.

Campbell, with which they had consulted on a "Soup is good for you" campaign, had originally offered to buy Living Well outright, to the tune of some $4 million. The Kuntzlemans had thought about the offer long and hard. But they had felt some doubts about Campbell's ability to market fitness, and they hesitated to give up their hard-won independence.

Finally, regretfully, they had declined, settling instead for the $75,000 investment. Ever since, they had been quietly kicking themselves.

Then a curious thing happened. The April 1982 issue of INC. magazine arrived on Beth's desk, and, flipping through it, she happened upon a feature entitled "The Gospel According to Fatjo." Tom Fatjo, she read, was a dynamic young Houston businessman. In 1967, while an accountant with Deloitte, Haskins & Sells, he founded the company that would eventually become Browning-Ferris Industries Inc., the largest solid-waste disposal enterprise in the country. In 1975, Fatjo had stepped down as head of BFI to pursue a new passion: the development of a lavish complex known as The Houstonian, a combination hotel, spa, and health-and-fitness center for harried executives.

As she read the article, Beth had an idea. "Should I give this guy a call?" she wrote in the margin before forwarding the issue to her husband.

"Why not?" Charles wrote back. "The worst he can say is no."

When the Kuntzlemans contacted The Houstonian, they were routed to marketing director Horace S. Irwin, who asked them to drop by during a convention of the National American Alliance for Health, Physical Education, Recreation and Dance, which they were attending in Houston the following week. They had a friendly dinner with Irwin, were introduced to Fatjo, and finally, at the end of the day, had a chance to show Irwin their program and materials. "All of a sudden he starts jumping all over the place," Charles recalls, "and he says, 'Tom's got to meet you guys, I mean, really meet with you."

A week later, the Kuntzlemans made their presentation to Fatjo. "Tom didn't say anything, not a word," Charles explains. "He just sat there, really impassive, and you could sense he was looking through the back of your head. Twenty minutes into the conversation, he cracked his knuckles, and I thought, 'He's interested.'

"When we were done, he finally said, 'Well, I've got a meeting at 12, but I'd like you to stay until this afternoon."

That first meeting had been a demonstration of Fatjo's often calm, deliberative, and somewhat secretive manner. The second was quite different in tone. "Tom started on this roll," Charles remembers, "and he just blew me right out of the water. He was proposing a national distribution system, a program that health professionals could buy into, allowing them to become entrepreneurs . . . . I mean, I'd been thinking nickel and dime, and this guy is talking billions."

On July 29, in Spring Arbor, the Kuntzlemans and Fatjo signed a still-confidential deal giving The Houstonian exclusive rights to Living Well. While waiting for lawyers to work out the final details, Tom and Charles, avid practitioners of what they preach, shared some yogurt beneath a tree, then went for a six-mile run. Charles even penned a commemorative poem in honor of the signing: "After Campbell's we had hit a real low,/ But we caught our breaths and said 'We'd go.'/ Go on our own to sell Living Well/To teachers and leaders and those who sell . . . ." Doggerel it may have been, but it captured the spirit of the moment.

Today, thanks to that bit of serendipity, Living Well is a $20-million-a-year operation headed by Fatjo. In a little over two years it has trained 2,900 individuals employed by 25 different companies and institutions.

That, however, is considerably less than half the story of this surprising company-in-the-making. "The Gospel According to Fatjo" observed that the man's career has consisted of a series of missions -- to become an entrepreneur, to build a national company, to devote himself to fitness. Fatjo now has a fourth mission: to build a second national company, this one based on fitness, that could surpass even Browning-Ferris Industries in size. Already, Living Well has embarked on a two-year $100-million acquisitions effort designed to make it a significant presence in 50 major cities. By 1989, Fatjo claims, Living Well will be "the IBM of fitness."

Such a prediction, if anyone else were to make it, would sound like idle boasting. In Fatjo's case, skepticism is allayed by a simple fact: Fatjo is the man responsible for BFI, the IBM of trash.

Browning-Ferris Industries's rapid rise to the ranks of giant U.S. corporations -- with 15,500 employees and annual revenues of $953 million, it controls about 8% of the entire U.S. market -- was unusual enough. Even more unusual was the fact that Fatjo, in effect, created a brand-new national industry. Most waste-removal companies, he discovered, were small, local operations, typically owned by men in their fifties, without much capital for modernization or expansion. The companies and their owners stood to gain a lot from the money and expertise a buyout by BFI could provide. BFI, for its part, stood to grow by acquiring as many such companies as it possibly could. At one point, Fatjo and his management team were averaging five acquisitions a month. Put together, all these acquisitions made a national company where none had existed before.

In 1975, Fatjo left BFI. "The company was going well, he explained to INC. in that earlier article. "It had strong management, was being operated on a regional basis by good people, and wasn't going through a strong growth period. There was no big need for me." He had, moreover, other things on his mind. Building up BEI had taken a toll on him -- on his personal life, and on his body -- and he had subsequently become something of a physicalfitness buff. Now he wanted to create "a center that would have a positive impact on the lives of busy people, that would help them to be more productive for a long period of time.

"I wanted it to be a place," he added, "where people could attend conventions, learn something about fitness, enjoy some exercise -- a place that would bring balance back into their lives." The result of this mission was The Houstonian, which opened in 1980 and was showing a $1-million profit by the end of 1981.

As Fatjo had hoped, The Houstonian resurrected exhausted businesspeople. Its programs began with thorough physicals, moved into exercise classes, and continued with programs on stress, nutrition and smoking. But Fatjo was well aware of the limitations of the approach. "The Houstonian had been elitist by design," he explains. "We thought that by having an impact on the health and fitness of executives, we'd also have an impact on their employees." In an isolated instance or two, the strategy worked. James T. Ketelsen, the chairman of Tenneco Inc., who had discovered that he needed coronary bypass surgery during a Houstonian physical, subsequently set up a fitness center for the employees at Tenneco's headquarters. But for the most part, The Houstonian's message -- that it was possible to have a healthy and rewarding life as well as a productive and profitable one -- remained a gospel heard by only a few.

In January 1982, three months before he met the Kuntzlemans, Fatjo gave Horace Irwin the task of researching the fitness industry, with the intention of eventually marketing The Houstonian's programs nationally. Then Charles and Beth Kuntzleman turned up, at what was possibly the perfect moment. Their fitness program was a sophisticated and appealing product, and they had years of solid experience in implementing such programs for customers like the national Young Men's Christian Association and Phillips Petroleum Co.

Initially, Fatjo's aim was simply to market Living Well through corporations, much as the Kuntzlemans had done. A company's employees, sometimes subsidized by the company itself, would pay around $150 each to take one of the program s three basic 12-week courses (diet and nutrition, cardiovascular health, and overall wellness and stress management) at their workplace. "A person comes twice a week, for 15 minutes of lecture and 45 minutes of exercise," Fatjo explains, adding that the client's progress is closely monitored and analyzed with the aid of computers. Introduced in July 1983, this incarnation of Living Well has made itself welcome in a variety of settings. Its customers range from the Chapelwood United Methodist Church in Houston to Allied Corp., the $10-billion-a-year conglomerate based in Morristown, N.J.

The customers, for the most part, have been satisfied. Lorraine Daigle, corporate manager of occupational nursing and special medical programs at Allied, likes Living Well's emphasis on aerobics and stretching exercises (no expensive machines are needed), and its computer-based monitoring system, which allows her to keep track of financial payoffs to Allied as well as individual self-improvement more easily. Daigle herself signed up for the first program, and is now both a convert and an ex-smoker. "I'm sorry to say that I used to be a three-packer a day . . . I've just completed 10 months of abstinence," she notes. Although still waiting for the results of an in-house study of Living Well's effects, she is convinced that there are bottom-line benefits. Living Well's own studies report 55% reductions in their customers' health-care costs; productivity improvements of 52%; reductions in absenteeism of 58%; reductions in turnover of 33%; and a return on investment of $5.60 for every dollar spent on the program.

But as Living Well began to make its way into the marketplace, a number of problems surfaced. The national distribution system Fatjo had outlined to the Kuntzlemans depended on signing up fitness professionals who were already active in the field and transforming them into entrepreneurs. But these professionals were not, for the most part, good businesspeople. "They didn't have a sense of going for the jugular, of closing the sale," Charles Kuntzleman explains. Fatjo also recognized that the Living Well program could lead to a dead end. Once participants had been through the three courses, they were left on their own, predisposed to backsliding. And Living Well was left with the need to go out and find new customers.

Then, one winter day, Fatjo was reading an article in Time magazine on the fitness industry: What he read began to fit together with Irwin's market studies and with his own experiences at BFI and The Houstonian. Health and fitness, Fatjo suddenly realized, had much in common with trash. It was an immense industry -- Time put it at $35 billion annually -- but it was highly fragmented, with a somewhat less-than-august image. And it was hamstrung by a lack of capital for expansion. "It absolutely amazed me," Fatjo recalls. "Here I'd been involved in health and fitness since 1975, and I had no idea of the scope of the industry. It was bigger than tobacco, and rapidly catching up with alcohol. I related this to the founding of Browning-Ferris."

Waste disposal, Fatjo had once concluded, was in industry searching for an identity. Fitness, he concluded just one year was groping for that same sense of self.

"When you think about tobacco, think Winston or Camel or True, when you think about alcohol, you thin Dewars or Budweiser or Coors. But when you think about fitness . . . " Fatjo pauses, running the question through his mind one more time, "you don't think of an thing -- there's no industry leader, no acknowledged national presence. We resolved to become that company."

Fatjo, to lie sure, was not alone in this ambition. Five years ago Control Data Corp. (CDC) of Minneapolis was concerned with rapidly rising health-care costs, and in response implemented a corporate "wellness" program of its own design. Dubbed StayWell, the program was remarkably successful and generated a lot of outside interest. In 1981, CDC established StayWell as a product, and has so far offered the program to some 55,000 employees of 44 different corporations. StayWell 'resembles Living Well: At the moment, in fact, the principal distinction between the two packages may lie their prices. StayWell's full offering costs $150 per person per year as opposed to Living Well's $450 price tag for a 36-week program.

In April 1983, Bally Manufacturing Corp., in Chicago, also became a major player in fitness, acquiring Health & Tennis Corp. of America (HTCA) for $72 million plus a five-year earn-out of around $56 million. HTCA had been built up over a period of 22 years by fitness fanatics Roy Zurkowski and Donahue L. Wildman, who purchased troubled but nonetheless promising athletic clubs. It now encompasses 287 centers in some 21 states, with almost 1.3 million members and annual revenues of $264 million, all of it backed by Bally's $1.3 billion (1983 revenues) clout. "I'd call that a national presence," says a spokesperson.

Both CDC and Bally, however, are unaware of the grand scope of Fatjo's vision -- and each, ironically, has confirmed the soundness of his strategy. CDC is doing one-half of his projected business; Bally is doing the other.

Living Well, Fatjo explains, has fashioned a seven-point strategy -- and the tone of his voice makes clear that he regards those seven points as carved in stone. It has been more than two years since he and the Kuntzlemans made contact, and Fatjo, his environment, and what he is doing have all changed. He has moved out of his house on the grounds of The Houstonian and into the hotel, in part because of the demands of a hectic travel schedule. He is still tall and lean, an obvious runner, but now he is more tan, with longer hair that curls behind his ears: Less Texan, it might be said, and a bit more Hollywood. The only incongruous detail is the declasse Coke he sips as he enumerates the seven points:

1. To identify 50 major markets that Living Well can operate in (later he admits that the number will probably rise to 70).

2. To put two or three salespeople in each market to sell the Living Well program to corporations.

3. To acquire in each market at least 10 "satellite" athletic facilities where Living Well graduates and the general public alike can pursue "a lifetime of health and fitness."

4. To acquire, in each of the principal markets (New York, Chicago, Los Angeles, and Atlanta), a "premiere" facility comparable to The Houstonian.

5. To develop an extensive line of products ranging from diet foods to expensive exercise equipment.

6. To initiate a major public-relations effort aimed at making Living Well a household word with the 80 million Americans who exercise regularly.

7. To develop a shareholder base of individuals committed to the goal of personal fitness.

It is a demanding agenda, combining CDC's emphasis on fitness programs with Bally's focus on athletic facilities. What makes it credible is Fatjo himself, who brings to the enterprise a breadth of vision and a depth of experience that is hard to match. "Fatjo's a unique critter, even in this city," remarks one Houston banker who has done business with him. "These days, everybody seems to be looking for his niche -- his little hole in the great market wall. Tom stakes out the whole goldarn wall."

Fatjo has already laid a solid foundation for the enterprise. Realizing that the monumental financial demands of the undertaking were more than he and his partners in The Houstonian could shoulder, he quickly made plans to fold the assets of The Houstonian into Living Well, then take Living Well public; in May of this year he completed a stock offering that raised $5 million. He had done much the same thing with BFI. In that case, Fatjo had folded his own company, American Refuse Systems Inc., into publicly held Browning-Ferris Machinery Co., of Dallas and Houston, which provided him with much of the capital he needed to buy out trash collectors.

This time, Fatjo significantly underestimated the cash requirements of his new mission: Athletic facilities do not come cheap. "I really didn't know so much capital was going to be required," he concedes, taking a sip of warm Coke.

For nearly a year, Fatjo and another Houston businessman, Dr. LeRoy A. Pesch, had wanted to do something together. Pesch, formerly of Chicago, is chairman and chief executive officer of Health Resources Corp. of America (HRCA), which owns and operates three hospitals in the United States, and had been drawn to Houston by its concentration of health facilities -- The Methodist Hospital/Baylor University complex, The Preventive Medicine Institute, the Scurlock Center, and The Houstonian. Pesch and Fatjo soon got acquainted, and developed a mutual respect. Fatjo "has an enormous amount of leadership presence in the fitness industry," observes Pesch.

The needs of their companies, they realized, might easily mesh. HRCA, on the one hand, was determined to move beyond the traditional role of caring for the sick. "There was an emerging need," explains Pesch, "to provide preventive medical services, and, beyond that, to move into the wellness field." Living Well, which had its own preventive medicine center and was devoted to corporate health, seemed a perfect partner. To Fatjo, on the other hand, HRCA's capital resources and impeccable medical credentials were equally alluring. In July of this year the two companies announced that they would merge, in a cash-stock transaction valued at $40 million, with Houstonian Inc. becoming a wholly-owned subsidiary of HRCA.

At last Houstonian seemed solidly positioned to begin acquiring the facilities Fatjo wanted. "In the next two years," said Fatjo, "we'll be able to effectively utilize approximately $100 million of capital." HRCA, which had seen its revenues shoot from $86 million in fiscal 1984 to a projected $200 million for fiscal '85, was ready to foot the bill.

But then, in August, one of those pitfalls that mark progress along any interesting path caused Houstonian to stumble. HRCA, reconsidering its move away from the hospital-management field it knew so well, decided against the proposed merger, leaving open the possibility, for awhile, of some other, unspecified joint venture. But then, late in the month, both parties broke off conversations. There would be no combined effort. For Houstonian, which had predicated its aggressive acquisitions program on HRCA stock, it was an obvious setback, but far from a dead end. "This leaves us -- in terms of our goals and strategy -- essentially where we were before the merger was suggested," notes Houstonian president Michael J. Milner. Houstonian, he adds, intends to keep to its acquisitions schedule, making use of other options.

Fatjo, who is now talking with other "investors," has become, if anything, more optimistic. "You know, when you play in a football game, before you go out on the field, you're always nervous," he explains. "Then somebody hits you pretty hard, and, boy, that nervousness goes away, and you get on with the game . . . ."

Flexibility is, after all, one of the hallmarks of Fatjo's style. "That's Tom's genius," says Charles Kuntzleman. "His ability to push against the market, see where it's going to give, and, when it doesn't work, an amazing capacity to just turn 180 degrees, and head off in another direction . . . . I'd be bullheaded, and keep banging away."

The Living Well staff is continuing to market its programs to corporations and institutions, and has made clever use of Fatjo's public involvement to get its name and its blazing red, white, and blue logo before the masses. A member of the President's Council on Physical Fitness & Sports since 1980, Fatjo was asked by council chairman George Allen to put together a Fitness Classic -- a competition featuring businesspeople, celebrities, and media representatives that would call attention to the importance of fitness. Fatjo not only developed the program, he donated The Houstonian's facilities, and for the past three years has hosted such stellar Classic contestants as Suzy Chaffee, Roger Staubach, and Rafer Johnson. When Allen envisioned National Fitness Testing Week -- an opportunity for millions of Americans to check their overall condition -- Fatjo helped manage the program and arranged a Houstonian tie-in. Today, the lobby of Living Well headquarters is festooned with flags and huge photos of Allen, Staubach, Fatjo, and President Reagan. "Keeping America physically fit has been done through the private sector and the unselfish voluntary efforts of people like yourself," reads a large Reagan quote. It is a patriotic brand of capitalism that sells increasingly well.

But if there is an operative directive at Living Well today, it is neither public relations nor business as usual. It is acquisition. A peek at Fatjo's schedule illustrates the priorities. July 18, 8 p.m.: dinner with acquisition candidate in candidate's home. July 19, 9 a.m.-noon: meet acquisition candidate with Living Well senior vice-president Russell Harris. 1 p.m.: leave to meet second acquisition candidate . . . on and on, week after week. "It's beginning to feel like old times," observes Fatjo. Not only does it "feel" like the early days of BFI, it even looks that way: At least three of the members of Houstonian's eight-man acquisitions team -- FaCjo, Roger Ramsey, and David Ruth -- were involved with the building of BFI. The industry the team is exploring also seems strangely familiar. "We're just short of reaching an agreement with a company in the South that has 80 centers in 14 cities, says Fatjo, "and the major factor that has inhibited their growth is lack of capital. Fragmentation, the need for capital, lack of a national identity -- it's the BFI scenario all over again.

"So far," observes Milner, "we've found most of the people we've talked to to be extremely receptive. We've had our concept confirmed -- there's a genuine feeling out there that there's a need for one or two companies to assume a leadership position." As this issue of INC. went to press, Living Well was conducting serious discussions with 20 different organizations, and by the time you read this will probably have signed its first deal. By utilizing a variety of resources and options -- cash, stock, considerations based on the future success of the local operations, ongoing participation of management -- Fatjo hopes that, within five years, Living Well will have established a firm 50-market base, and will have enticed some 5 million Americans to sign up.

Initially, the acquirees will change little. Most of the clubs purchased will require no face-lifts or infusions of new people. "These are successful, well-run centers," says Milner, "and we re obviously anxious to hold onto the individuals who built them." Not even the names will change; the "XYZ" club in Atlanta, for instance, might simply become "XYZ -- A Living Well Center." Still, even in the early stages, Fatjo expects the new organization to have a major impact. The centers, for example, will become a significant part of the national marketing effort, with representatives selling Living Well programs to area institutions and signing up Living Well graduates to club memberships. The centers will also market a full line of health and fitness products. Fatjo has signed agreements with some 110 manufacturers, and a catalog is due out shortly.

Organizationally, as was the case with BFI, local operations will remain largely autonomous, but with guidelines, systems, materials, and support provided by headquarters. "My philosophy," Milner explains, echoing Fatjo's sentiments, "has always been to have as little centralized management as possible . . . particularly in a service business as personal as this." Houston will standardize reporting procedures and offer centralized computer services for fitness evaluations, recommended diets, and so on. Otherwise, the centers will be on their own.

Eventually, Fatjo expects a certain evolution, a synergy of engaging gears, to take place. Clubs may adopt a more uniform appearance and approach to fitness training, and may offer Living Well courses in-house. Living Well preventive-medicine centers, like the one at The Houstonian, may spring up in conjunction with local hospitals. Fatjo is thrilled about all the possibilities. The company in the making, in short, really is a potential "IBM of fitness."

CDC, Bally, and others will not, of course, sit idly by. "We're very familiar with what Fatjo's doing," says Stephen M. Ruff, national product line manager for CDC's StayWell program. "We've researched all of those kinds of things and, for the moment, we intend to stick with a worksite-based concept -- which is not to say that we might not do something different in the future."

William Peltier, vice-president/corporate communications for Bally, observes, somewhat critically, "Fatjo's going to have to hustle to catch up with these guys [HTCA's Zurkowski and Wildman]." He notes that HTCA is still looking at clubs it might acquire, and recently completed renovating one in Morton Grove, Ill., that it bills as "the biggest in the world." Peltier doesn't exactly issue a challenge -- but, he says, "Bally doesn't mind good competition."

So far as Fatjo knows, however, none of his competitors are undertaking the mission he has set for himself -- a combination of corporate fitness programs, premiere and satellite health facilities, preventivemedicine centers, instructional materials -- everything, right down to the vitamins and the jogging clothes. And he has no doubt whatsoever that he can pull it off, competition or no.

"We've been involved in the acquisitions process for six weeks," says Fatjo, "and, based on that, I'm convinced this is an industry waiting to be born. The field is more fertile, and it's certainly much larger, than the one we encountered with BFI.

"I want to be careful not to convince myself that, just because we did it at BFI, We'll be able to do it again," he adds. "BFI represented an incredible opportunity, and it was a success, but today . . . " He pauses, grows thoughtful. "Today, success is in front of us, and we just have to do it again. You've got to be a believer."